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Automobile manufacturers and importers in Vietnam have protested a new proposal from the Ministry of Finance which seeks to change how luxury tax on cars is calculated.

Under the ministry's plan, the special consumption tax on all vehicles with fewer than 24 seats will be based on their retail prices, with rates ranging from 15 to 60 percent.

The proposal, set to take effect on January 1 next year, is aimed to create a level playing field for importers and producers since their cars will be treated the same, the ministry said.

Currently, the luxury tax on imported cars is calculated on the Cost, Insurance Freight (CIF) price rather than the final retail price, a policy that manufacturers said could give importers an unfair advantage.

They said local products could not compete with imported cars since local cars are taxed based on retail prices, which include a number of additional costs.

Many automobile importers, after learning about the new proposal, said they are asking the government to keep the current policy unchanged so that the market and business environment is not disrupted.

If sales go down, tax revenues will also fall, they said.

It is "reasonable" and "accurate" to tax imported cars on their CIF prices because the prices already carry the taxes that foreign manufacturers have paid before shipping the cars to Vietnam, news website VnEconomy quoted VIVA, the association of car importers in Vietnam, as saying.

Consumption

Strangely, even local carmakers are not happy with the proposal. The new policy, with tax rates as high as 60 percent, it is not exactly what they want, which is to lower the luxury tax to spur consumption.

The Vietnam Automobile Manufacturers’ Association has been urging the government to calculate the tax on delivery cost, before sale and post-sale costs are added.

The Ministry of Finance, however, is leaning towards collecting more taxes from importers.

Speaking to Thanh Nien, representatives of many importers and manufacturers in Ho Chi Minh City said the new tax scheme, if applied, will increase car prices by 20-30 percent.

This will have an adverse impact on the market, they said

"When taxes go up, we are forced to hike prices. In the end, no one other than consumers will be hurt," a representative of a distributor who wished to stay unnamed said.

Nguyen Minh Dong, an industry expert, also said increases in taxes will not help boost the economy, but may hamper its growth.

In fact, "the biggest problem" with Vietnam's auto industry is that here a car is subject to a wide range of taxes and fees, making it "extremely expensive" for the majority of consumers, he said.

Looming threat

The Japan Business Association in Vietnam has recently warned that if local policies for the auto industry continue to be ineffective, the industry will hardly survive when cars brought from other Southeast Asian countries are free of import duties in 2018 under a regional agreement.

Increased imports will create trade deficit and in the end, hinder economic growth, VnEconomy quoted the association as saying at a recent meeting.

Vietnam's carmakers posted sales of 157,810 units last year, compared to 1.3 million in Indonesia, nearly 900,000 in Thailand, and 700,000 in Malaysia.

Imports have been increasing considerably as the government has reduced import duties gradually in accordance with trade pacts that Vietnam have signed with other countries.

Vietnam imported 72,000 complete-built-unit cars last year, twice the number of 2013, the association quoted official statistics as saying.

A total of 45,000 cars, worth over $1.2 billion, were brought into the country in the first five months of this year.